Revaluation of Chinese Yuan

The revaluation debate began when the U.S. government had continued to urge China to revalue the Yuan from Yuan 8.28/$. They argued that the growing Chinese trade surplus with the U.S. indicated that the Yuan was significantly overvalued. The Chinese government did not think that same. They believe in accordance with the bilateral trade surplus with the U.S. was a result of competitiveness, cost of production, and changing global industry structures. On July 20, U.S. and Hong Kong were informed that China would alter its exchange regime from a dollar-peg to a managed float.

Question 1Many Chinese critics had urged China to revalue the Yuan by 20% or more. What would the Chinese Yuan’s value be in U.S. dollars if it had indeed been devalued by 20%?

Both politically and economically motivated

Political Reasoning:

A move in order to reduce pressures growing between governments, while at the same time, the Chinese government wanted their economy and the Yuan to be a prominent role in the global economy, becoming equal with the US dollar, Japanese Yen, and Euro.

Rapid growth of the country also played a role in the move to become a larger part of the global economy.

Economical Reasoning:

Has a lot to do with the rapid growth of the country.

China is seen as relatively cheap in terms of manufacturing

Many multinational companies have manufacturing operations set up within China, reaping the benefits of the cost of labour and production.

The impact the revaluation had on the Chinese companies was potentially major over the long run.

Companies would suffer a 2% increase in cost versus foreign market pricing immediately.

The Yuan’s new freedom to float incrementally over time presented them with a new and growing operational risk from exchange rates over time.

For a 30 day period the Yuan would appreciate by 9.4% bringing the exchange rate up to 7.5685 Yuan/Dollar.

(1.003)^30= 1.094 -1 = .094 or 9.4%

8.28/1+.094= 7.5685 Yuan/Dollar

For a 60 day period...